G.R. No.

L-11658 February 15, 1918

LEUNG YEE, plaintiff-appellant,

vs.
FRANK L. STRONG MACHINERY COMPANY and J. G. WILLIAMSON, defendants-
appellees.

Booram and Mahoney for appellant.

Williams, Ferrier and SyCip for appellees.

CARSON, J.:

The "Compañia Agricola Filipina" bought a considerable quantity of rice-cleaning machinery

company from the defendant machinery company, and executed a chattel mortgage thereon to
secure payment of the purchase price. It included in the mortgage deed the building of strong
materials in which the machinery was installed, without any reference to the land on which it
stood. The indebtedness secured by this instrument not having been paid when it fell due, the
mortgaged property was sold by the sheriff, in pursuance of the terms of the mortgage
instrument, and was bought in by the machinery company. The mortgage was registered in the
chattel mortgage registry, and the sale of the property to the machinery company in
satisfaction of the mortgage was annotated in the same registry on December 29, 1913.

A few weeks thereafter, on or about the 14th of January, 1914, the "Compañia Agricola
Filipina" executed a deed of sale of the land upon which the building stood to the machinery
company, but this deed of sale, although executed in a public document, was not registered.
This deed makes no reference to the building erected on the land and would appear to have
been executed for the purpose of curing any defects which might be found to exist in the
machinery company's title to the building under the sheriff's certificate of sale. The machinery
company went into possession of the building at or about the time when this sale took place,
that is to say, the month of December, 1913, and it has continued in possession ever since.

At or about the time when the chattel mortgage was executed in favor of the machinery
company, the mortgagor, the "Compañia Agricola Filipina" executed another mortgage to the
plaintiff upon the building, separate and apart from the land on which it stood, to secure
payment of the balance of its indebtedness to the plaintiff under a contract for the construction
of the building. Upon the failure of the mortgagor to pay the amount of the indebtedness
secured by the mortgage, the plaintiff secured judgment for that amount, levied execution upon
the building, bought it in at the sheriff's sale on or about the 18th of December, 1914, and had
the sheriff's certificate of the sale duly registered in the land registry of the Province of Cavite.

At the time when the execution was levied upon the building, the defendant machinery
company, which was in possession, filed with the sheriff a sworn statement setting up its claim
of title and demanding the release of the property from the levy. Thereafter, upon demand of
the sheriff, the plaintiff executed an indemnity bond in favor of the sheriff in the sum of
P12,000, in reliance upon which the sheriff sold the property at public auction to the plaintiff,
who was the highest bidder at the sheriff's sale.

This action was instituted by the plaintiff to recover possession of the building from the
machinery company.

The trial judge, relying upon the terms of article 1473 of the Civil Code, gave judgment in favor
of the machinery company, on the ground that the company had its title to the building
registered prior to the date of registry of the plaintiff's certificate.

Article 1473 of the Civil Code is as follows:

If the same thing should have been sold to different vendees, the ownership shall be
transfer to the person who may have the first taken possession thereof in good faith, if it
should be personal property.
 Should it be real property, it shall belong to the person acquiring it who first recorded it
in the registry.

Should there be no entry, the property shall belong to the person who first took
possession of it in good faith, and, in the absence thereof, to the person who presents
the oldest title, provided there is good faith.

The registry her referred to is of course the registry of real property, and it must be apparent
that the annotation or inscription of a deed of sale of real property in a chattel mortgage
registry cannot be given the legal effect of an inscription in the registry of real property. By its
express terms, the Chattel Mortgage Law contemplates and makes provision for mortgages of
personal property; and the sole purpose and object of the chattel mortgage registry is to
provide for the registry of "Chattel mortgages," that is to say, mortgages of personal property
executed in the manner and form prescribed in the statute. The building of strong materials in
which the rice-cleaning machinery was installed by the "Compañia Agricola Filipina" was real
property, and the mere fact that the parties seem to have dealt with it separate and apart from
the land on which it stood in no wise changed its character as real property. It follows that
neither the original registry in the chattel mortgage of the building and the machinery installed
therein, not the annotation in that registry of the sale of the mortgaged property, had any effect
whatever so far as the building was concerned.

We conclude that the ruling in favor of the machinery company cannot be sustained on the
ground assigned by the trial judge. We are of opinion, however, that the judgment must be
sustained on the ground that the agreed statement of facts in the court below discloses that
neither the purchase of the building by the plaintiff nor his inscription of the sheriff's certificate
of sale in his favor was made in good faith, and that the machinery company must be held to
be the owner of the property under the third paragraph of the above cited article of the code, it
appearing that the company first took possession of the property; and further, that the building
and the land were sold to the machinery company long prior to the date of the sheriff's sale to
the plaintiff.

It has been suggested that since the provisions of article 1473 of the Civil Code require "good
faith," in express terms, in relation to "possession" and "title," but contain no express
requirement as to "good faith" in relation to the "inscription" of the property on the registry, it
must be presumed that good faith is not an essential requisite of registration in order that it
may have the effect contemplated in this article. We cannot agree with this contention. It could
not have been the intention of the legislator to base the preferential right secured under this
article of the code upon an inscription of title in bad faith. Such an interpretation placed upon
the language of this section would open wide the door to fraud and collusion. The public
records cannot be converted into instruments of fraud and oppression by one who secures an
inscription therein in bad faith. The force and effect given by law to an inscription in a public
record presupposes the good faith of him who enters such inscription; and rights created by
statute, which are predicated upon an inscription in a public registry, do not and cannot accrue
under an inscription "in bad faith," to the benefit of the person who thus makes the inscription.

Construing the second paragraph of this article of the code, the supreme court of Spain held in
its sentencia of the 13th of May, 1908, that:

This rule is always to be understood on the basis of the good faith mentioned in the first
paragraph; therefore, it having been found that the second purchasers who record their
purchase had knowledge of the previous sale, the question is to be decided in
accordance with the following paragraph. (Note 2, art. 1473, Civ. Code, Medina and
Maranon [1911] edition.)

Although article 1473, in its second paragraph, provides that the title of conveyance of
ownership of the real property that is first recorded in the registry shall have preference,
this provision must always be understood on the basis of the good faith mentioned in
the first paragraph; the legislator could not have wished to strike it out and to
sanction bad faith, just to comply with a mere formality which, in given cases, does not
 obtain even in real disputes between third persons. (Note 2, art. 1473, Civ. Code,
issued by the publishers of the La Revista de los Tribunales, 13th edition.)

The agreed statement of facts clearly discloses that the plaintiff, when he bought the building
at the sheriff's sale and inscribed his title in the land registry, was duly notified that the
machinery company had bought the building from plaintiff's judgment debtor; that it had gone
into possession long prior to the sheriff's sale; and that it was in possession at the time when
the sheriff executed his levy. The execution of an indemnity bond by the plaintiff in favor of the
sheriff, after the machinery company had filed its sworn claim of ownership, leaves no room for
doubt in this regard. Having bought in the building at the sheriff's sale with full knowledge that
at the time of the levy and sale the building had already been sold to the machinery company
by the judgment debtor, the plaintiff cannot be said to have been a purchaser in good faith; and
of course, the subsequent inscription of the sheriff's certificate of title must be held to have
been tainted with the same defect.

Perhaps we should make it clear that in holding that the inscription of the sheriff's certificate of
sale to the plaintiff was not made in good faith, we should not be understood as questioning, in
any way, the good faith and genuineness of the plaintiff's claim against the "Compañia Agricola
Filipina." The truth is that both the plaintiff and the defendant company appear to have had just
and righteous claims against their common debtor. No criticism can properly be made of the
exercise of the utmost diligence by the plaintiff in asserting and exercising his right to recover
the amount of his claim from the estate of the common debtor. We are strongly inclined to
believe that in procuring the levy of execution upon the factory building and in buying it at the
sheriff's sale, he considered that he was doing no more than he had a right to do under all the
circumstances, and it is highly possible and even probable that he thought at that time that he
would be able to maintain his position in a contest with the machinery company. There was no
collusion on his part with the common debtor, and no thought of the perpetration of a fraud
upon the rights of another, in the ordinary sense of the word. He may have hoped, and
doubtless he did hope, that the title of the machinery company would not stand the test of an
action in a court of law; and if later developments had confirmed his unfounded hopes, no one
could question the legality of the propriety of the course he adopted.

But it appearing that he had full knowledge of the machinery company's claim of ownership
when he executed the indemnity bond and bought in the property at the sheriff's sale, and it
appearing further that the machinery company's claim of ownership was well founded, he
cannot be said to have been an innocent purchaser for value. He took the risk and must stand
by the consequences; and it is in this sense that we find that he was not a purchaser in good
faith.

One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot
claim that he has acquired title thereto in good faith as against the true owner of the land or of
an interest therein; and the same rule must be applied to one who has knowledge of facts
which should have put him upon such inquiry and investigation as might be necessary to
acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes to
facts which should put a reasonable man upon his guard, and then claim that he acted in good
faith under the belief that there was no defect in the title of the vendor. His mere refusal to
believe that such defect exists, or his willful closing of his eyes to the possibility of the
existence of a defect in his vendor's title, will not make him an innocent purchaser for value, if
afterwards develops that the title was in fact defective, and it appears that he had such notice
of the defects as would have led to its discovery had he acted with that measure of precaution
which may reasonably be acquired of a prudent man in a like situation. Good faith, or lack of it,
is in its analysis a question of intention; but in ascertaining the intention by which one is
actuated on a given occasion, we are necessarily controlled by the evidence as to the conduct
and outward acts by which alone the inward motive may, with safety, be determined. So it is
that "the honesty of intention," "the honest lawful intent," which constitutes good faith implies a
"freedom from knowledge and circumstances which ought to put a person on inquiry," and so it
is that proof of such knowledge overcomes the presumption of good faith in which the courts
always indulge in the absence of proof to the contrary. "Good faith, or the want of it, is not a
visible, tangible fact that can be seen or touched, but rather a state or condition of mind which
can only be judged of by actual or fancied tokens or signs." (Wilder vs. Gilman, 55 Vt., 504,
505; Cf. Cardenas Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros.
Co. vs. Bromley, 119 Mich., 8, 10, 17.)

We conclude that upon the grounds herein set forth the disposing part of the decision and
judgment entered in the court below should be affirmed with costs of this instance against the
appellant. So ordered.

Arellano, C.J., Johnson, Araullo, Street and Malcolm, JJ., concur.

Torres, Avanceña and Fisher, JJ., took no part.

G.R. No. L-82564 October 13, 1989

IGMIDIO ABANDO and CONSOLACION ABANDO, petitioners,

vs.
FRANCISCO LOZADA, MILAGROS LOZADA and THE HONORABLE COURT OF
APPEALS, respondents.

Romeo G. Carlos for petitioners.

Cesar R. Canonizado for private respondents.

GANCAYCO, J.:

In this petition for review on certiorari what is sought is to reverse the ruling of the Court of
Appeals finding and declaring that private respondents herein, the spouses Francisco and
Milagros Lozada, are purchasers in good faith of certain parcels of land. 1

The facts leading to the controversy are as follows:

Petitioners herein, the spouses Igmidio and Consolacion Abando, are the registered owners of
three (3) parcels of land all located at Malamig Street, Mandaluyong, Metro Manila. The said
lots are covered by Transfer Certificates of Title Nos. 21196, 21197 and 100771, all in the
name of the spouses Abando.

Trouble began sometime in November 1976 when the spouses Abando, through the efforts of
Romeo Cuevas, treasurer of Prime Exchange Co., Inc. (hereinafter referred to as Prime
Exchange), met Ernesto Pucan, president of the said corporation. Immediately thereafter, an
offer for the spouses Abando to invest in Prime Exchange was made by Pucan. The idea was
for the spouses to incorporate their three lots as their contribution to Prime Exchange. This
proposal was turned down by the spouses.

Cuevas and Pucan persevered, and instead, offered to lease the three lots from the spouses
Abando. To lure the spouses into agreeing to the proposition, Cuevas and Pucan represented
that Prime Exchange would construct a five (5) storey building on the land. As additional
incentives, Cuevas and Pucan promised that the spouses Abando would administer the
building; that they would be given a place to dwell thereon; that they would be guaranteed an
annual income of twenty thousand one hundred and sixty pesos (P20,160.00); and that their
son would be given a job. By reason of this apparent magnanimity on the part of Cuevas and
Pucan, the spouses finally agreed to lease their properties to Prime Exchange.

Later, Cuevas and Pucan presented to the spouses copies of the purported lease contract for
signature. Unknown to the latter, only one of these copies contains the stipulations of the lease
contract they agreed upon. Through deceit and trickery, Cuevas and Pucan were able to
convince the spouses to sign all the copies of the contract without reading but one of them. On
the pretext that the contracts have yet to be notarized, none was left for the spouses.
To continue with the grand swindle, Pucan later borrowed the three transfer certificates of title
from the spouses on the pretext that the company engineer needed the same for the
immediate construction of the building. A week later, Pucan went back to see the petitioners
bringing with him a document purportedly needed by the engineer who will draft the plan and
specifications of the building. On the excuse that he was in a hurry, Pucan again succeeded in
making the spouses sign without reading the contents of the document.

Later and much to their dismay, the spouses Abando discovered that they were duped all
along. The first batch of documents they signed turned out to be a "Joint Venture Agreement"
while the second document was in reality a "Deed of Assignment of their three (3) parcels of
land in favor of Prime Exchange in consideration of one hundred forty-four thousand pesos
(P144,000.00) worth of preferred shares of stock of the corporation. No building was ever
erected on their land. Neither did petitioners receive the yearly income as promised, nor did
they become owners of stocks in Prime Exchange.

When it dawned upon petitioners that they had been defrauded, they looked for the
perpetrators at the latter's office along Buendia Avenue in Makati but found out that the office
had already been transferred. After so much effort, they finally located Pucan at the fourth floor
of Amparo Building along España, Manila.

Convinced that Pucan's promises were empty gestures of sincerity in returning to them their
certificates of title, the spouses went to the Office of the Register of Deeds of Pasig and to their
chagrin learned that their titles-Transfer Certificates of Title Nos. 21196, 21197 and 100771
have already been replaced by Transfer Certificates of Title Nos. 2844, 2845 and 2846
respectively, all in favor of Prime Exchange.

As if the tragic discoveries were not enough, they also found out that Prime Exchange had
already sold two of the three parcels of land to Ernesto Pucan. Thus, Transfer Certificates of
Title Nos. 2845 and 2846 had already been replaced by Transfer Certificates of Title Nos.
6300 and 6301 in the name of Pucan.

It was found out that on June 30, 1977, Pucan mortgaged the two parcels of land to private
respondents herein the spouses Francisco and Milagros Lozada for and in consideration of the
amount of sixty thousand pesos (P60,000.00). When Pucan failed to pay the loan at maturity,
proceedings for the extrajudicial foreclosure of the real estate mortgage were initiated by the
spouses Lozada. The bidding was held on June 30, 1978 and the said parcels of land were
awarded to the spouses Lozada as highest bidder. No one redeemed the property within the
prescribed period, hence, titles over the properties were consolidated in the name of Francisco
and Milagros Lozada. Subsequently, Transfer Certificates of Title Nos. 6300 and 6301 were
cancelled and Transfer Certificates of Title Nos. 20694 and 20695 were issued in their stead.

Thereupon, petitioners instituted an action before the then Court of First Instance of Rizal,
Branch X for the revival, restitution and restoration of Transfer Certificates of Title Nos. 21196,
21197 and 100771 that sought among others the following: the cancellation of Transfer
Certificates of Title Nos. 20695, 20696 and 2844; the nullification of the Joint Venture
Agreement and the Deed of Assignment; the nullification of the Deed of Sale executed
between Prime Exchange and Pucan; and the nullification of the subsequent mortgage
contract between Pucan and private respondents herein.

After trial, the lower court ruled:

WHEREFORE, premises considered, judgment is hereby rendered declaring null

and void the joint venture agreement (Exh. D), the deed of assignment (Exh. E),
the deed of sale between Prime Exchange Co., Inc. and Ernesto Pucan (Exhibit
1), the deed of first mortgage executed by Ernesto Pucan and Romeo Cuevas in
favor of Eutiquio Vasquez and the certificates of sales executed by the sheriff in
favor of Vasquez and Lozada; Transfer Certificate of Title No. 2844 in the name
of defendant Prime Exchange Co., Inc. is hereby declared null and void and
Transfer Certificate of Title No. 21196 in the name of plaintiffs is hereby revived
 Transfer Certificates of Title Nos. 20695 and 20696 in the name of defendant
Francisco Lozada are hereby declared null and void and Transfer Certificates of
Title Nos. 2119 and 100771 in the names of plaintiffs are hereby revived. ... .

SO ORDERED.2

On appeal, the respondent court modified the decision of the lower court and ruled:

WHEREFORE, premises considered, the decision of the lower court is modified

and a new judgment is hereby rendered to read as follows:

1. Declaring Francisco and Milagros Lozada the lawful owners of the two parcels
of land covered by Transfer Certificates of Title Nos. 20694 and 20695;

2. x x x.

SO ORDERED.3

The third parcel of land covered by Transfer Certificate of Title No. 2844 is not a subject matter
of this petition. It is only that portion of the Court of Appeals' decision relating to the two other
parcels (originally under TCT Nos. 21197 and 100771) that are raised in this appeal. Thus, this
Court prefers not to narrate any longer the peccant transactions perpetuated by Cuevas and
Pucan relative thereto.

After going over the records of this case, this Court finds no cogent reason to disturb the ruling
of respondent Court of Appeals.

As correctly pointed out by the appellate court,4 the strategem, the deceit, the
misrepresentations employed by Cuevas and Pucan are facts constitutive of fraud which is
defined in Article 1338 of the Civil Code as that insiduous words or machinations of one of the
contracting parties, by which the other is induced to enter into a contract which, without them,
he would not have agreed to. When fraud is employed to obtain the consent of the other party
to enter into a contract, the resulting contract is merely a voidable contract, that is, a valid and
subsisting contract until annulled or set aside by a competent court. 5 Thus, contrary to the
assertion of petitioners 6 the joint venture agreement and the deed of assignment which they
unknowingly signed are not void contracts. In fact, this Court has ruled upon a similar question
in the case of Rivero vs. Court of Appeals.7 In that particular case, this Court held that when
one party was made to think by the other that the contract he had signed was one of mortgage
when in fact it was one of sale, the resulting contract is a voidable contract of sale.

Bearing in mind this legal truism, We now come to the core issue raised in this petition. Can
the spouses Lozada be considered purchasers in good faith?

Petitioners assert the negative. They claim that the respondent court erred in not considering
the totality of the circumstances which culminated in the sale at public auction of the subject
lots. Petitioners allege that the inquiry should not have been limited to the time of the auction
sale, but rather, should have gone back to that time when these same properties were
mortgaged to the spouses Lozada. Petitioners then point to the evidence on record showing
that at the particular day the mortgage was executed between Ernesto Pucan and the
Lozadas, Transfer Certificates of Title Nos. 6300 and 6301 were not yet in existence. In fact,
they added, these titles were issued only in the name of Pucan, the mortgagor, a day after the
mortgage contract was perfected.8 They also argue that had private respondents made an
inquiry as to who was in possession of the property they would have found the petitioners in
possession thereof.

While concededly there is a point in petitioners' argument that "[a] mortgagee in bad faith
cannot shed his bad faith color by the mere expedient of an auction sale of the same property
where he himself is the highest bidder,9however, even if We consider the environmental
circumstance of the present controversy, this Court finds and so holds that no substantial
reason exists to disturb the finding that private respondents are indeed in good faith.

Good faith refers to a state of the mind which is manifested by the acts of the individual
concerned. It consists of the honest intention to abstain from taking an unconscionable and
unscrupulous advantage of another. It is the opposite of fraud, and its absence should be
established by convincing evidence.10

On the other hand, bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the
nature of fraud.11

While it is true that at the time the real estate mortgage was executed, title was not yet
registered in the name of the mortgagor, however, the evidence on record does not disclose
that the mortgagees were privy to or even aware of the fraud and deceit used by Pucan upon
the original owners of the land. Standing alone, the fact that the private respondents did not
investigate the title to the properties offered as collaterals does not constitute convincing
evidence to rebut the presumption that they are in good faith. Under the rules on evidence, a
presumption exists that private transactions have been fair and regular. 12 More so when, as in
this instant case, investigation of the titles had become moot, when on the following day, titles
to the mortgage lots were issued in the name of the mortgagor Pucan. 13

As correctly pointed out by the private respondents herein, the cases of Leung Yee vs. F.L.
Strong Machinery Co. and Williamson14 and Conspecto vs. Fruto15 find no application to the
case at bar. In Leung Yee there is evidence to support the finding of bad faith because it was
established that plaintiff therein had full knowledge of a claim by another entity when he bought
the property at the sheriff's sale. Thus, this Court emphasized the following:

But it appearing that he had full knowledge of the machinery company's claim of
ownership when he executed the indemnity bond and bought the property at the
sheriffs sale, and it appearing further that the machinery company's claim of
ownership was well founded, he cannot be said to have been an innocent
purchaser for value. He took the risk and must stand by the consequences; and it
is in this sense that we find that he was not a purchaser in good
faith. 16 (emphasis supplied).

Likewise, in the case of Conspecto, this Court made the following observation,

... it clearly appears that on the 14th day of October, 1911, when Zacarias
Conspecto purchased the land from the heirs of Venancio Liquigan each of the
defendants was in possession, and had been for a long time, of his respective
parcel. There is no proof that, knowing that the land or a portion of it was in the
actual possession of others than the vendor, the buyer made any inquiry
concerning the rights of such possessors 17 (Emphasis supplied.)

In the present case, unlike Conspecto, private respondents had no prior knowledge petitioners
were in actual possession of the property. They had no duty to inspect the property before
granting the loan. They did not have to inquire beyond the titles of the property. And no doubt
in this case the clean transfer certificates of title were issued in the name of the mortgagors.

As stated earlier, no such knowledge or even a tinge of awareness of the fraudulent

transactions can be attributed to private respondents; no precipitate haste or irregularity
characterized the proceedings at the foreclosure sale. On the contrary, there is evidence to
bolster private respondents' claim of innocence and good faith. Prior to the foreclosure
proceeding, Francisco Lozada not only relied on the two certificates of title that were exhibited
to him, he even went out of his way and verified from the records of the Register of Deeds if
the properties were really in the name of Pucan.18
Paraphrasing a principle enunciated by this Court in Blondeau and De la Cantera vs. Nano and
Vallejo,19 "as between two innocent persons, the mortgagee and the real owner of the
mortgage property one of whom must suffer the consequence of fraud, the one who made it
possible by his act of confidence must bear the loss."

WHEREFORE, the judgment "declaring Francisco and Milagros Lozada the lawful owners of
the two parcels of land covered by Transfer Certificates of Title Nos. 20694 and 20695" is
hereby AFFIRMED; and the petition is hereby DISMISSED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 81262 August 25, 1989

GLOBE MACKAY CABLE AND RADIO CORP., and HERBERT C. HENDRY, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and RESTITUTO M. TOBIAS, respondents.

Atencia & Arias Law Offices for petitioners.

Romulo C. Felizmena for private respondent.

CORTES, J.:

Private respondent Restituto M. Tobias was employed by petitioner Globe Mackay Cable and
Radio Corporation (GLOBE MACKAY) in a dual capacity as a purchasing agent and
administrative assistant to the engineering operations manager. In 1972, GLOBE MACKAY
discovered fictitious purchases and other fraudulent transactions for which it lost several
thousands of pesos.

According to private respondent it was he who actually discovered the anomalies and reported
them on November 10, 1972 to his immediate superior Eduardo T. Ferraren and to petitioner
Herbert C. Hendry who was then the Executive Vice-President and General Manager of
GLOBE MACKAY.

On November 11, 1972, one day after private respondent Tobias made the report, petitioner
Hendry confronted him by stating that he was the number one suspect, and ordered him to
take a one week forced leave, not to communicate with the office, to leave his table drawers
open, and to leave the office keys.

On November 20, 1972, when private respondent Tobias returned to work after the forced
leave, petitioner Hendry went up to him and called him a "crook" and a "swindler." Tobias was
then ordered to take a lie detector test. He was also instructed to submit specimen of his
handwriting, signature, and initials for examination by the police investigators to determine his
complicity in the anomalies.

On December 6,1972, the Manila police investigators submitted a laboratory crime report (Exh.
"A") clearing private respondent of participation in the anomalies.

Not satisfied with the police report, petitioners hired a private investigator, retired Col. Jose G.
Fernandez, who on December 10, 1972, submitted a report (Exh. "2") finding Tobias guilty.
This report however expressly stated that further investigation was still to be conducted.

Nevertheless, on December 12, 1972, petitioner Hendry issued a memorandum suspending

Tobias from work preparatory to the filing of criminal charges against him.
On December 19,1972, Lt. Dioscoro V. Tagle, Metro Manila Police Chief Document Examiner,
after investigating other documents pertaining to the alleged anomalous transactions,
submitted a second laboratory crime report (Exh. "B") reiterating his previous finding that the
handwritings, signatures, and initials appearing in the checks and other documents involved in
the fraudulent transactions were not those of Tobias. The lie detector tests conducted on
Tobias also yielded negative results.

Notwithstanding the two police reports exculpating Tobias from the anomalies and the fact that
the report of the private investigator, was, by its own terms, not yet complete, petitioners filed
with the City Fiscal of Manila a complaint for estafa through falsification of commercial
documents, later amended to just estafa. Subsequently five other criminal complaints were
filed against Tobias, four of which were for estafa through Falsification of commercial
document while the fifth was for of Article 290 of' the Revised Penal Code (Discovering Secrets
Through Seizure of Correspondence).lâwphî1.ñèt Two of these complaints were refiled with
the Judge Advocate General's Office, which however, remanded them to the fiscal's office. All
of the six criminal complaints were dismissed by the fiscal. Petitioners appealed four of the
fiscal's resolutions dismissing the criminal complaints with the Secretary of Justice, who,
however, affirmed their dismissal.

In the meantime, on January 17, 1973, Tobias received a notice (Exh. "F") from petitioners that
his employment has been terminated effective December 13, 1972. Whereupon, Tobias filed a
complaint for illegal dismissal. The labor arbiter dismissed the complaint. On appeal, the
National Labor Relations Commission (NLRC) reversed the labor arbiter's decision. However,
the Secretary of Labor, acting on petitioners' appeal from the NLRC ruling, reinstated the labor
arbiter's decision. Tobias appealed the Secretary of Labor's order with the Office of the
President. During the pendency of the appeal with said office, petitioners and private
respondent Tobias entered into a compromise agreement regarding the latter's complaint for
illegal dismissal.

Unemployed, Tobias sought employment with the Republic Telephone Company (RETELCO).
However, petitioner Hendry, without being asked by RETELCO, wrote a letter to the latter
stating that Tobias was dismissed by GLOBE MACKAY due to dishonesty.

Private respondent Tobias filed a civil case for damages anchored on alleged unlawful,
malicious, oppressive, and abusive acts of petitioners. Petitioner Hendry, claiming illness, did
not testify during the hearings. The Regional Trial Court (RTC) of Manila, Branch IX, through
Judge Manuel T. Reyes rendered judgment in favor of private respondent by ordering
petitioners to pay him eighty thousand pesos (P80,000.00) as actual damages, two hundred
thousand pesos (P200,000.00) as moral damages, twenty thousand pesos (P20,000.00) as
exemplary damages, thirty thousand pesos (P30,000.00) as attorney's fees, and costs.
Petitioners appealed the RTC decision to the Court of Appeals. On the other hand, Tobias
appealed as to the amount of damages. However, the Court of Appeals, an a decision dated
August 31, 1987 affirmed the RTC decision in toto. Petitioners' motion for reconsideration
having been denied, the instant petition for review on certiorari was filed.

The main issue in this case is whether or not petitioners are liable for damages to private
respondent.

Petitioners contend that they could not be made liable for damages in the lawful exercise of
their right to dismiss private respondent.

On the other hand, private respondent contends that because of petitioners' abusive manner in
dismissing him as well as for the inhuman treatment he got from them, the Petitioners must
indemnify him for the damage that he had suffered.

One of the more notable innovations of the New Civil Code is the codification of "some basic
principles that are to be observed for the rightful relationship between human beings and for
the stability of the social order." [REPORT ON THE CODE COMMISSION ON THE
PROPOSED CIVIL CODE OF THE PHILIPPINES, p. 39]. The framers of the Code, seeking to
remedy the defect of the old Code which merely stated the effects of the law, but failed to draw
out its spirit, incorporated certain fundamental precepts which were "designed to indicate
certain norms that spring from the fountain of good conscience" and which were also meant to
serve as "guides for human conduct [that] should run as golden threads through society, to the
end that law may approach its supreme ideal, which is the sway and dominance of justice" (Id.)
Foremost among these principles is that pronounced in Article 19 which provides:

Art. 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith.

This article, known to contain what is commonly referred to as the principle of abuse of rights,
sets certain standards which must be observed not only in the exercise of one's rights but also
in the performance of one's duties. These standards are the following: to act with justice; to
give everyone his due; and to observe honesty and good faith. The law, therefore, recognizes
a primordial limitation on all rights; that in their exercise, the norms of human conduct set forth
in Article 19 must be observed. A right, though by itself legal because recognized or granted by
law as such, may nevertheless become the source of some illegality. When a right is exercised
in a manner which does not conform with the norms enshrined in Article 19 and results in
damage to another, a legal wrong is thereby committed for which the wrongdoer must be held
responsible. But while Article 19 lays down a rule of conduct for the government of human
relations and for the maintenance of social order, it does not provide a remedy for its violation.
Generally, an action for damages under either Article 20 or Article 21 would be proper.

Article 20, which pertains to damage arising from a violation of law, provides that:

Art. 20. Every person who contrary to law, wilfully or negligently causes damage
to another, shall indemnify the latter for the same.

However, in the case at bar, petitioners claim that they did not violate any provision of law
since they were merely exercising their legal right to dismiss private respondent. This does not,
however, leave private respondent with no relief because Article 21 of the Civil Code provides
that:

Art. 21. Any person who wilfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall compensate the latter
for the damage.

This article, adopted to remedy the "countless gaps in the statutes, which leave so many
victims of moral wrongs helpless, even though they have actually suffered material and moral
injury" [Id.] should "vouchsafe adequate legal remedy for that untold number of moral wrongs
which it is impossible for human foresight to provide for specifically in the statutes" [Id. it p.
40; See also PNB v. CA, G.R. No. L-27155, May 18,1978, 83 SCRA 237, 247].

In determining whether or not the principle of abuse of rights may be invoked, there is no rigid
test which can be applied. While the Court has not hesitated to apply Article 19 whether the
legal and factual circumstances called for its application [See for e.g., Velayo v. Shell Co. of
the Phil., Ltd., 100 Phil. 186 (1956); PNB v. CA, supra; Grand Union Supermarket, Inc. v.
Espino, Jr., G.R. No. L-48250, December 28, 1979, 94 SCRA 953; PAL v. CA, G.R. No. L-
46558, July 31,1981,106 SCRA 391; United General Industries, Inc, v. Paler G.R. No. L-
30205, March 15,1982,112 SCRA 404; Rubio v. CA, G.R. No. 50911, August 21, 1987, 153
SCRA 183] the question of whether or not the principle of abuse of rights has been violated
resulting in damages under Article 20 or Article 21 or other applicable provision of law,
depends on the circumstances of each case. And in the instant case, the Court, after
examining the record and considering certain significant circumstances, finds that all
petitioners have indeed abused the right that they invoke, causing damage to private
respondent and for which the latter must now be indemnified.
The trial court made a finding that notwithstanding the fact that it was private respondent
Tobias who reported the possible existence of anomalous transactions, petitioner Hendry
"showed belligerence and told plaintiff (private respondent herein) that he was the number one
suspect and to take a one week vacation leave, not to communicate with the office, to leave
his table drawers open, and to leave his keys to said defendant (petitioner Hendry)" [RTC
Decision, p. 2; Rollo, p. 232]. This, petitioners do not dispute. But regardless of whether or not
it was private respondent Tobias who reported the anomalies to petitioners, the latter's reaction
towards the former upon uncovering the anomalies was less than civil. An employer who
harbors suspicions that an employee has committed dishonesty might be justified in taking the
appropriate action such as ordering an investigation and directing the employee to go on a
leave. Firmness and the resolve to uncover the truth would also be expected from such
employer. But the high-handed treatment accorded Tobias by petitioners was certainly
uncalled for. And this reprehensible attitude of petitioners was to continue when private
respondent returned to work on November 20, 1972 after his one week forced leave. Upon
reporting for work, Tobias was confronted by Hendry who said. "Tobby, you are the crook and
swindler in this company." Considering that the first report made by the police investigators
was submitted only on December 10, 1972 [See Exh. A] the statement made by petitioner
Hendry was baseless. The imputation of guilt without basis and the pattern of harassment
during the investigations of Tobias transgress the standards of human conduct set forth in
Article 19 of the Civil Code. The Court has already ruled that the right of the employer to
dismiss an employee should not be confused with the manner in which the right is exercised
and the effects flowing therefrom. If the dismissal is done abusively, then the employer is liable
for damages to the employee [Quisaba v. Sta. Ines-Melale Veneer and Plywood Inc., G.R. No.
L-38088, August 30, 1974, 58 SCRA 771; See also Philippine Refining Co., Inc. v. Garcia,
G.R. No. L-21871, September 27,1966, 18 SCRA 107] Under the circumstances of the instant
case, the petitioners clearly failed to exercise in a legitimate manner their right to dismiss
Tobias, giving the latter the right to recover damages under Article 19 in relation to Article 21 of
the Civil Code.

But petitioners were not content with just dismissing Tobias. Several other tortious acts were
committed by petitioners against Tobias after the latter's termination from work. Towards the
latter part of January, 1973, after the filing of the first of six criminal complaints against Tobias,
the latter talked to Hendry to protest the actions taken against him. In response, Hendry cut
short Tobias' protestations by telling him to just confess or else the company would file a
hundred more cases against him until he landed in jail. Hendry added that, "You Filipinos
cannot be trusted." The threat unmasked petitioner's bad faith in the various actions taken
against Tobias. On the other hand, the scornful remark about Filipinos as well as Hendry's
earlier statements about Tobias being a "crook" and "swindler" are clear violations of 'Tobias'
personal dignity [See Article 26, Civil Code].

The next tortious act committed by petitioners was the writing of a letter to RETELCO
sometime in October 1974, stating that Tobias had been dismissed by GLOBE MACKAY due
to dishonesty. Because of the letter, Tobias failed to gain employment with RETELCO and as
a result of which, Tobias remained unemployed for a longer period of time. For this further
damage suffered by Tobias, petitioners must likewise be held liable for damages consistent
with Article 2176 of the Civil Code. Petitioners, however, contend that they have a "moral, if not
legal, duty to forewarn other employers of the kind of employee the plaintiff (private respondent
herein) was." [Petition, p. 14; Rollo, p. 15]. Petitioners further claim that "it is the accepted
moral and societal obligation of every man to advise or warn his fellowmen of any threat or
danger to the latter's life, honor or property. And this includes warning one's brethren of the
possible dangers involved in dealing with, or accepting into confidence, a man whose honesty
and integrity is suspect" [Id.]. These arguments, rather than justify petitioners' act, reveal a
seeming obsession to prevent Tobias from getting a job, even after almost two years from the
time Tobias was dismissed.

Finally, there is the matter of the filing by petitioners of six criminal complaints against Tobias.
Petitioners contend that there is no case against them for malicious prosecution and that they
cannot be "penalized for exercising their right and prerogative of seeking justice by filing
criminal complaints against an employee who was their principal suspect in the commission of
forgeries and in the perpetration of anomalous transactions which defrauded them of
substantial sums of money" [Petition, p. 10, Rollo, p. 11].

While sound principles of justice and public policy dictate that persons shall have free resort to
the courts for redress of wrongs and vindication of their rights [Buenaventura v. Sto. Domingo,
103 Phil. 239 (1958)], the right to institute criminal prosecutions can not be exercised
maliciously and in bad faith [Ventura v. Bernabe, G.R. No. L-26760, April 30, 1971, 38 SCRA
5871.] Hence, in Yutuk V. Manila Electric Co., G.R. No. L-13016, May 31, 1961, 2 SCRA 337,
the Court held that the right to file criminal complaints should not be used as a weapon to force
an alleged debtor to pay an indebtedness. To do so would be a clear perversion of the function
of the criminal processes and of the courts of justice. And in Hawpia CA, G.R. No. L-20047,
June 30, 1967. 20 SCRA 536 the Court upheld the judgment against the petitioner for actual
and moral damages and attorney's fees after making a finding that petitioner, with persistence,
filed at least six criminal complaints against respondent, all of which were dismissed.

To constitute malicious prosecution, there must be proof that the prosecution was prompted by
a design to vex and humiliate a person and that it was initiated deliberately by the defendant
knowing that the charges were false and groundless [Manila Gas Corporation v. CA, G.R. No.
L-44190, October 30,1980, 100 SCRA 602]. Concededly, the filing of a suit by itself, does not
render a person liable for malicious prosecution [Inhelder Corporation v. CA, G.R. No. 52358,
May 301983122 SCRA 576]. The mere dismissal by the fiscal of the criminal complaint is not a
ground for an award of damages for malicious prosecution if there is no competent evidence to
show that the complainant had acted in bad faith [Sison v. David, G.R. No. L-11268, January
28,1961, 1 SCRA 60].

In the instant case, however, the trial court made a finding that petitioners acted in bad faith in
filing the criminal complaints against Tobias, observing that:

xxx

Defendants (petitioners herein) filed with the Fiscal's Office of Manila a total of six
(6) criminal cases, five (5) of which were for estafa thru falsification of
commercial document and one for violation of Art. 290 of the Revised Penal
Code "discovering secrets thru seizure of correspondence," and all were
dismissed for insufficiency or lack of evidence." The dismissal of four (4) of the
cases was appealed to the Ministry of Justice, but said Ministry invariably
sustained the dismissal of the cases. As above adverted to, two of these cases
were refiled with the Judge Advocate General's Office of the Armed Forces of the
Philippines to railroad plaintiffs arrest and detention in the military stockade, but
this was frustrated by a presidential decree transferring criminal cases involving
civilians to the civil courts.

xxx

To be sure, when despite the two (2) police reports embodying the findings of Lt.
Dioscoro Tagle, Chief Document Examiner of the Manila Police Department,
clearing plaintiff of participation or involvement in the fraudulent transactions
complained of, despite the negative results of the lie detector tests which
defendants compelled plaintiff to undergo, and although the police investigation
was "still under follow-up and a supplementary report will be submitted after all
the evidence has been gathered," defendants hastily filed six (6) criminal cases
with the city Fiscal's Office of Manila, five (5) for estafa thru falsification of
commercial document and one (1) for violation of Art. 290 of the Revised Penal
Code, so much so that as was to be expected, all six (6) cases were dismissed,
with one of the investigating fiscals, Asst. Fiscal de Guia, commenting in one
case that, "Indeed, the haphazard way this case was investigated is evident.
Evident likewise is the flurry and haste in the filing of this case against
respondent Tobias," there can be no mistaking that defendants would not but be
 motivated by malicious and unlawful intent to harass, oppress, and cause
damage to plaintiff.

xxx

[RTC Decision, pp. 5-6; Rollo, pp. 235-236].

In addition to the observations made by the trial court, the Court finds it significant that the
criminal complaints were filed during the pendency of the illegal dismissal case filed by Tobias
against petitioners. This explains the haste in which the complaints were filed, which the trial
court earlier noted. But petitioners, to prove their good faith, point to the fact that only six
complaints were filed against Tobias when they could have allegedly filed one hundred cases,
considering the number of anomalous transactions committed against GLOBE MACKAY.
However, petitioners' good faith is belied by the threat made by Hendry after the filing of the
first complaint that one hundred more cases would be filed against Tobias. In effect, the
possible filing of one hundred more cases was made to hang like the sword of Damocles over
the head of Tobias. In fine, considering the haste in which the criminal complaints were filed,
the fact that they were filed during the pendency of the illegal dismissal case against
petitioners, the threat made by Hendry, the fact that the cases were filed notwithstanding the
two police reports exculpating Tobias from involvement in the anomalies committed against
GLOBE MACKAY, coupled by the eventual dismissal of all the cases, the Court is led into no
other conclusion than that petitioners were motivated by malicious intent in filing the six
criminal complaints against Tobias.

Petitioners next contend that the award of damages was excessive. In the complaint filed
against petitioners, Tobias prayed for the following: one hundred thousand pesos
(P100,000.00) as actual damages; fifty thousand pesos (P50,000.00) as exemplary damages;
eight hundred thousand pesos (P800,000.00) as moral damages; fifty thousand pesos
(P50,000.00) as attorney's fees; and costs. The trial court, after making a computation of the
damages incurred by Tobias [See RTC Decision, pp. 7-8; Rollo, pp. 154-1551, awarded him
the following: eighty thousand pesos (P80,000.00) as actual damages; two hundred thousand
pesos (P200,000.00) as moral damages; twenty thousand pesos (P20,000.00) as exemplary
damages; thirty thousand pesos (P30,000.00) as attorney's fees; and, costs. It must be
underscored that petitioners have been guilty of committing several actionable tortious acts,
i.e., the abusive manner in which they dismissed Tobias from work including the baseless
imputation of guilt and the harassment during the investigations; the defamatory language
heaped on Tobias as well as the scornful remark on Filipinos; the poison letter sent to
RETELCO which resulted in Tobias' loss of possible employment; and, the malicious filing of
the criminal complaints. Considering the extent of the damage wrought on Tobias, the Court
finds that, contrary to petitioners' contention, the amount of damages awarded to Tobias was
reasonable under the circumstances.

Yet, petitioners still insist that the award of damages was improper, invoking the principle of
damnum absque injuria. It is argued that "[t]he only probable actual damage that plaintiff
(private respondent herein) could have suffered was a direct result of his having been
dismissed from his employment, which was a valid and legal act of the defendants-appellants
(petitioners herein).lâwphî1.ñèt " [Petition, p. 17; Rollo, p. 18].

According to the principle of damnum absque injuria, damage or loss which does not constitute
a violation of a legal right or amount to a legal wrong is not actionable [Escano v. CA, G.R. No.
L-47207, September 25, 1980, 100 SCRA 197; See also Gilchrist v. Cuddy 29 Phil, 542
(1915); The Board of Liquidators v. Kalaw, G.R. No. L-18805, August 14, 1967, 20 SCRA 987].
This principle finds no application in this case. It bears repeating that even granting that
petitioners might have had the right to dismiss Tobias from work, the abusive manner in which
that right was exercised amounted to a legal wrong for which petitioners must now be held
liable. Moreover, the damage incurred by Tobias was not only in connection with the abusive
manner in which he was dismissed but was also the result of several other quasi-delictual acts
committed by petitioners.
Petitioners next question the award of moral damages. However, the Court has already ruled
in Wassmer v. Velez, G.R. No. L-20089, December 26, 1964, 12 SCRA 648, 653, that [p]er
express provision of Article 2219 (10) of the New Civil Code, moral damages are recoverable
in the cases mentioned in Article 21 of said Code." Hence, the Court of Appeals committed no
error in awarding moral damages to Tobias.

Lastly, the award of exemplary damages is impugned by petitioners. Although Article 2231 of
the Civil Code provides that "[i]n quasi-delicts, exemplary damages may be granted if the
defendant acted with gross negligence," the Court, in Zulueta v. Pan American World Airways,
Inc., G.R. No. L- 28589, January 8, 1973, 49 SCRA 1, ruled that if gross negligence warrants
the award of exemplary damages, with more reason is its imposition justified when the act
performed is deliberate, malicious and tainted with bad faith. As in the Zulueta case, the nature
of the wrongful acts shown to have been committed by petitioners against Tobias is sufficient
basis for the award of exemplary damages to the latter.

WHEREFORE, the petition is hereby DENIED and the decision of the Court of Appeals in CA-
G.R. CV No. 09055 is AFFIRMED.

SO ORDERED.